Chapter 4 External Environment

     This chapter discusses a companies external environment in which is can provide many business opportunities and also business threats.  The book then talks about how a company can use the SWOT analysis.  Which you have seen before is, strength, weaknesses, opportunities, and threats. This is a very easy tool for a company to use to see where they stand and where they need to improve.  I am going to talk about Michael Porter's five-forces model, which determines the basic structure of an industry and how they relate to Merck.

     First is rivalry, which is intensity of competition within an industry. For many years Merck's rivals were Pfizer, GlaxoSmithkline, and Novartis.  They would compete against each other to see how could get out new drugs the fastest and then would hold that patent for 20 years so competing companies could not produce a similar drug.  In the past few years though these companies have started to work together, to develop new drugs. I would say the rivalries between companies was fierce, but not on the same level as a Coke/Pepsi.

     Next is threat of entry and exit barriers.  These mean how easy a company can enter into the industry, compete in that industry, and if needed to exit the industry would it be possible without a high cost. I do not believe that Merck has to worry about new rivals, getting into a new venture, or exiting a particular drug area.  Merck is considered one the big drug companies so if a new up and coming company started to compete, Merck could just buy the company and add it to its portfolio.  Merck has many of times exited a venture when a drug did not get approved by the FDA.  Of course it could cost millions upon millions of dollars, but Merck is such a large company it does not affect its bottom line too much.

     Supplier power is the third leg in Porter's model. Merck has great supplier power because they have a decent amount of control in the pharmaceutical market. Since Merck does have its own plants in which they develop for drugs, they really do not need outside suppliers.  These suppliers know this so if Merck wants to do business with them, Merck already has the edge because the supplier need Merck more than Merck needs the supplier.

     Buyer power is the fourth aspect in Porter's model.  Merck also has great control in this market. If a company is does not want to negotiate with Merck, then Merck will  somewhere else.  This could shut the plant down, and even destroy a whole town.

     The last is in Porter's model is threat of substitutes.  This is the area where Merck is most vulnerable especially in the area of expiration of patents.   A pharmaceutical patent lasts 20 years if no changes are done to a drug.  Merck's asthma and allergy drug, Singulair, patent expired in in August 3, 2012 and over the past year Merck lost 75% of its sales to a generic drug. Now, Merck has to develop new drugs to offset the losts of Singular sales.